Whitehead’s Law

40 years ago, Gordon Moore started the silicon chip revolution with his Moore’s Law. Today, Whitehead’s Law is driving the outsourcing revolution.

by Jay Whitehead

When I started my media career in Silicon Valley in 1982, one law reigned supreme: Moores Law. In 1965, Electronics magazine published Intel co-founder Gordon Moores famous piece predicting the scaling effect that the number of transistors on silicon chips would continue to double every few years. In 1975, engineers put 65,000 transistors on a chip. Today, capacity is more than 1,000,000,000 (thats one billion). Moores Law has driven commercial innovations in digital technology for four decades. It has crushed hard-drive prices by 14,000 percent in seven years. It has made PCs a $299 commodity. It has made Game Boys, iPods, and cell phones cheaper than a steak dinner with a bottle of wine.

When Gordon Moore published his groundbreaking article, he plotted seven data points showing the year-overyear increase in the number of transistors per chip. The number seemed to double every few years. So he extrapolated predicting the trend into the foreseeable future. With those seven data points, Moores Law was born. In this article, I hope to make a similar prediction, this time with BPO in mind. I call this prognostication Whiteheads Law, because I can (being Publisher has its advantages). Here is the essence of Whiteheads Law: During the next 30 years, HRO, FAO, procurement outsourcing, and related BPO services will save their customers an additional 15 to 20 percent every five years. This prediction is based on the savings (or non-savings, which happened in the early days of the HRO and FAO markets) reported by more than 100 Fortune 1000 HRO and FAO customers. The actual savings number is a factor of the differential between the cost to manage HR and F&A administrative functions in-house versus via a third-party provider.

In Table 1, I have charted the actual cost savings realized by Fortune 1000 clients who have fully-implemented HRO and FAO projects and have reported their savings (and costs) for the years 1995 to 2005.

Putting Whiteheads Law out there is not without its risks. These risks are similar to those faced by Gordon Moore when he published his famous treatise in 1965. Specifically, predicting non-stop progress into the future based on a small number of data points is often statistically spurious. For those of you who remember your statistics from college, regression models often smack down theories like mine.

However, the productivity progress that outsourcers have recently made is truly astounding. For example, in employee benefits administration today, no employers in-house department, not even 1.3 million-employee Wal-Mart, can rival the savings delivered by big benefits players such as Hewitt, Towers Perrin (now ExcellerateHRO), Watson Wyatt, SHPS, CitiStreet, and others. In-house employer and accounting services are so out-gunned by their outsourced counterparts that even metrics guru Greg Hackett (founder of the Hackett Group, now part of AnswerThink) tells HR and finance leaders to stop measuring, and start outsourcing.

The savings magnification effect that Whiteheads Law predicts for the next 30 years is driven by three factors. First, the latest version of HR and finance information technologies are much more efficient than earlier versions. And these new systems are nearly always being sold to aggregators and providers, rather than directly to in-house departments. Very few in-house data centers can get the capital expenditure or budgets approved for such investments. So the outsourcers have the better mousetraps and will continue to out-gun the in-house guys.

Second, all the operating talent is going to the provider side of the ledger. People who really want to make a career out of continuous administrative operating improvements are on providers payrolls, not sitting in an HR or finance department. And third, competition among providers will continue to drive price and performance improvements at a pace far greater than in-house functionaries could ever hope to achieve.

You can believe Whiteheads Law or not. After all, it is only based on 10 years of historical data points. Some have told me that it wont hold water because at those savings levels, providers will simply go out of business. But that is also what was said about the PC business 20 years ago, and MIPS keep going up while the prices just keep coming down. The smart money will avoid betting against Whiteheads Law